It may surprise you to learn that the main investment in the 1970s was not stocks, bonds, real estate or traditional investments, but that it was gold that soared 2,300%. Private individuals were banned from owning gold in the United States for decades. This was followed by a crazy bull market for precious metals with a sudden end. Over the years, member countries of the system accumulated such large reserves in U.S.
dollars due to their current account surpluses that they surpassed U.S. gold reserves. However, the relationship between gold and the US dollar index remains and has a similar magnitude of -0.434 compared to the previous period. The wild 1970s and the subsequent falls in the price of gold have been etched in the memory of many investors.
The following figure shows that gold deposited in the Federal Reserve to support convertibility plummeted between 1949 and 1970, and when it became clear that convertibility could not be maintained indefinitely, parity was abandoned and, later, the price of gold rose relative to the main currencies. However, in a world of NIRP, at least gold doesn't guarantee a loss, unlike some government bonds that guarantee that you'll receive less money than you invested. It is not surprising, then, to learn that commodity price inflation was high during this period, as the value of fiat currencies fell to adapt to the abandonment of convertibility to gold. As we have repeatedly said, it is prudent to keep gold and gold stocks as part of a diversified portfolio.
Today, gold is an asset class in its own right and differs from other metals used in manufacturing, such as silver, platinum and palladium. This is where gold investors lose touch with economic reality and pursue ever higher prices in a feedback cycle of sky-high prices, “new-age thinking” and greed. In the 1970s, the depreciation of the currency resulting from the abandonment of the gold standard was a major driver of inflation in the consumer price index. Gold reached its all-time high in January 1980, two months before the start of the hostage-taking at the United States embassy in Iran.
In other words, U.S. dollars and the currencies of other Bretton Woods countries dramatically lost purchasing power relative to gold. In 1971, the United States finally decoupled the dollar from gold (the “Nixon shock”) and, in 1973, the Bretton Woods system came to an end. Interactive chart of historical data on the real (inflation-adjusted) prices of gold per ounce since 1915.